Question of the Day

Which is the greatest 'witch hunt' in American history?

I propose this new addition to my growing list of Reynolds’ Laws: “The closer we get to elections, the worse economic reporting becomes.”

Consider the recent Page One story in the New York Times, “Real wages fail to match a rise in productivity” by Steven Greenhouse and David Leonhardt. It began by claiming: “The current expansion has a chance to become the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers. The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation. The drop has been especially notable, economists say, because productivity — has risen steadily over the same period.”

The authors seem confused. The current expansion began in late 2001 and is not over, so whatever happened after hourly wages “peaked in early 2003” or “since last summer” tells us next to nothing about whether there will be an increase in real wages and benefits over the whole cycle.

The suggestion that every previous expansion offered “a prolonged increase in real wages” contradicts Mr. Leonhardt’s thesis in last year’s “Class Matters” series. His lead article, co-authored with Janny Scott on May 15, 2005, said, “For most workers, the only time in the last three decades when the rise in hourly pay beat inflation was during the speculative bubble of the 1990s.” In this week’s update, we are instead told that “for most of the last century, wages and productivity — have risen together.”

The title’s comparison of productivity to wages makes sense only if benefits are worthless to workers and free to employers. If productivity grew faster than total compensation, unit labor costs would be falling. Yet unit labor costs rose 3.2 percent over the last year, and real hourly compensation rose 1.7 percent.

Nonfarm business productivity rose 3 percent in 2004, and hourly compensation 3.6 percent; productivity rose by 2.3 percent in 2005, and hourly compensation rose 4.4 percent; productivity rose 2.7 percent in the first half of 2006, and hourly compensation rose by 6.2 percent. The headline should have read, “Productivity fails to match rise in worker compensation.”

The article ignores recent facts, but compares last year with the previous cycle’s peak. “Worker productivity rose 16.6 percent from 2000 to 2005, while total compensation for the median worker rose 7.2 percent, according to Labor Department statistics analyzed by the Economic Policy Institute (EPI), a liberal research group.”

Analyze this: The year 2000 was the peak of a nine-year expansion that was feeble during President Clinton’s first term, when real compensation fell in 1993, 1994 and 1995 and rose less than 1 percent in 1996. Yet this week’s New York Times complaint is that total compensation rose “only” 1.4 percent a year since the cyclical peak of 2000? How dumb do they think we are? How dumb do we know they are?

If benefits are ignored, “median weekly earnings” have not kept up with inflation lately (there is no official “median hourly wage”). The reason, which the authors discard too quickly, is that “nominal wages have accelerated in the last year, but the spike in oil costs has eaten up the gains.” Yet Mr. Greenhouse and Mr. Leonhardt quickly pass over that nonpartisan, global issue in favor of the irrelevant old policy wish list of “economists” — meaning the EPI-AFL-CIO.

“Economists offer various reasons for the stagnation of wages. Although the economy continues to add jobs, global trade, immigration, layoffs and technology — appear to have eroded workers’ bargaining power. Trade unions are much weaker than they once were, while the buying power of the minimum wage is at a 50-year low. — Together, these forces have caused a growing share of the economy to go to companies instead of workers’ paychecks. In the first quarter of 2006, wages and salaries represented 45 percent of gross domestic product, down from almost 50 percent in the first quarter of 2001.”

Mr. Leonhardt studied math, so it must have been painful for him to conjure up a Marxian contest between 45.3 percent for wages and 10.3 percent for profits when that obviously leaves 44.4 percent of gross domestic product unaccounted for. The missing 44.4 percent is nearly as big as wages, and nearly 4 times larger than before-tax profits, so why aren’t workers fighting for more of that 44.4 percent? They are, to some extent, since a fraction of that missing 44.4 percent is benefits. The authors admit “total employee compensation… was briefly lower than its current level of 56.1 percent in the mid-1990s.”

Yet more than a third of GDP is still missing, which is why serious economists never compare labor’s income shares to “gross” domestic product. GDP includes big items that are not any American’s income — notably, depreciation for wear and tear on everything from computers to highways.

The sensible practice is to examine labor compensation as a share of national income. Then, it turns out that “labor’s share of income has averaged 70 percent [of national income] over the past 50 years and has remained within a narrow range of that average,” according to the St. Louis Fed.

Ian Dew-Becker and Robert Gordon likewise found that, “contrary to the widespread impression that labor’s share has been squeezed, there was no change in labor’s share from 1996:Q3 to 2005:Q1…. Labor’s income share … fluctuated around a mean of 71.2 percent between early 1984 and early 2005.”

The article quotes myopic economists at Goldman Sachs saying, “The most important contributor to higher profit margins over the past five years has been a decline in labor’s share of national income.” Five years ago was 2001. Labor’s share of national income is always highest in recessions because profits are lousy (and lousy profits produce recessions).

The contradictory New York Times articles of May 2005 and last month seem to view economic nonfacts as malleable political propaganda. The latest piece says: “Political analysts are divided over how much the wage trends will help Democrats this fall in their effort to take control of the House and, in a bigger stretch, the Senate. Some see parallels to watershed political years like 1980, 1992 and 1994, when wage growth fell behind inflation, party alignments shifted and dozens of incumbents were thrown out of office.”

Perhaps so. With any luck, dozens of incumbents from both parties will be thrown out. Meanwhile, major newspapers might try being just a bit less partisan with the numbers, or at least less conspicuously uninformed.

Alan Reynolds is a senior fellow with the Cato Institute and a nationally syndicated columnist.